Market watch: US energy prices soften Thursday prior to rebound

By the OGJ Online Staff

HOUSTON, Dec. 28 -- US energy futures prices softened Thursday but bumped up in after-hours electronic trading with a production quota cut by the Organization of Petroleum Exporting Countries and a bullish report on domestic inventories.

After 7 weeks of negotiations with non-OPEC producers, OPEC ministers meeting in Cairo said early Friday that they would roll back their production quotas by 1.5 million b/d for 6 months starting Jan. 1. OPEC wanted non-member producers to cut their output by 500,000 b/d but finally settled for a promised reduction of 462,500 b/d.

"If cuts are made with a high degree of compliance, then the deal looks more than enough to not just support prices, but to push the value of the OPEC basket back into the low-$20/bbl (range) in coming months," said Paul Horsnell, head of energy research for London-based JP Morgan Chase & Co.

"Indeed, there is some danger of price overshooting," he said. "If all quantities come in as expected, then the price is supported. However, if demand proves to be not quite as poor as assumed, or if non-OPEC supply proves to be less buoyant or Iraqi production remains below normal as it has in December, then the market could tighten faster than expected."

The February contract for benchmark US light, sweet crudes dropped 37¢ to $20.90/bbl Thursday on the New York Mercantile Exchange, while the March position lost 31¢ to $21.14/bbl. However, both recovered in after-hours electronic trading to $21.29/bbl and $21.42/bbl, respectively.

Home heating oil for January delivery fell 1.31¢ to 58.15¢/gal Thursday on the NYMEX. Unleaded gasoline for the same month dipped 0.86¢ to 59.27¢/gal. The January natural gas contract plunged 35.6¢ to $2.56/Mcf.

Following the close of NYMEX's regular trading session Thursday, the American Petroleum Institute reported US gasoline stocks fell by 3.63 million bbl last week, while distillate inventories, including heating oil and diesel, were down by 650,000 bbl. US oil inventories increased by 154,000 bbl during the same period. That report is normally released on Tuesday but was delayed because of the Christmas holiday.

"After a bad start to the month, the level of apparent US oil demand continues to improve. The latest weekly figure is 20.52 million b/d, the highest since March and the fourth highest weekly figure in 2001," Horsnell said in a report issued early Friday.

"Given improved demand, and with US refinery runs falling to their lowest level since March 2000, oil product inventories have fallen while the low crude runs meant that crude inventories rose," he said. "Total commercial crude and product inventories fell by 7 million bbl to 1.01 billion bbl, taking this total to the lowest level for 3 months and bringing the fall over the last 3 weeks to 16.8 million bbl. US oil inventories are falling, but crude market conditions remain softer than those in oil product markets."

Oil futures prices rose sharply Thursday on the International Petroleum Exchange in London as that market caught up with gains made Wednesday in New York when it was closed.

The February contract for North Sea Brent crude settled at $20.34/bbl, up $1 for the day after trading in a range from the opening high of $20.88/bbl to as low as $19.98/bbl. The January natural gas contract dropped 5¢ to the equivalent of $3.92/Mcf on the IPE, however.

The average price for OPEC's benchmark basket of seven crudes gained 50¢ to $18.68/bbl Thursday.

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